# Bank reserve

U wouldn’t have guessed that after FSA, I’m now reviewing ECON !! If BJSH Bank is required to maintain a 20 percent reserve by its central bank, and currently it has excess reserves of \$500,000, what is the maximum amount of loan this bank can extend? A. \$100,000 B. \$400,000 C. \$500,000 D. \$2,500,000

C. All excess reserve.

D

C yup !!!

C

C. All excess reserve. D is the amount of money that can be created from these reserves through the money multiplier

strangedays Wrote: ------------------------------------------------------- > D That would be by how much the money increased

map1 Wrote: ------------------------------------------------------- > strangedays Wrote: > -------------------------------------------------- > ----- > > D > > > That would be by how much the money increased Yes thanks map…I just noticed that I messed up a bit with this Q!

strange u will REALLY hate me but answer is D The BJSH Bank can lend out all its excess reserves of \$500,000 initially. If borrowers deposit the money BJSH Bank lends out with BJSH again, BJSH can continue to keep the 20% as required reserve and lend out the rest. This process could potential “create” a total of \$2,500,000 in money supply. multiplier is equal 1/0,2 = 5 --> 500,000*5=2,500,000

But the question asks how much can they extent in loans, now by how much the money expand.

Soooo… I was right!!!

guess that could be the “maximum” amount they can loan taking the multiplier effect into account. Not worded very clearly though.

That is possible if ALL the loans they loan out come back to them to reloan and don’t go to any other bank.

map1 Wrote: ------------------------------------------------------- > But the question asks how much can they extent in > loans, now by how much the money expand. I guess we have to assume that there is no competitors and that all the loans are deposited in this bank

I don’t think that is a realistic assumption. Sure hope the questions on exam day are a little more clearly written to as what they are looking for us to know. Otherwise you will be overanalyzing every single question on the exam and it wouldn’t matter if you know the material or not.

rlange Wrote: ------------------------------------------------------- > I don’t think that is a realistic assumption. clearly not …

Dreary Wrote: ------------------------------------------------------- > Badly worded question. Answer is C. C not badly worded, just tricky. it got me, too. I went with .8% of 500,000 but of course, we now know it is EXCESS reserves. banx can do what they wish with that, since as we know, banx create by lending out the YOU LENT THEM (in the form of deposits)

daj224 Wrote: ------------------------------------------------------- > not badly worded, just tricky. it got me, too. > > I went with .8% of 500,000 but of course, we now > know it is EXCESS reserves. banx can do what they > wish with that, since as we know, banx create by \> lending out the YOU LENT THEM (in the form of > deposits) That is true, but they only have full control over the initial \$500,000 on who they lend that out to. Once they lend that out, the money will go to whichever bank the new “owner” of the money is. Unless this is the only bank in the country, chances are not likely they will recieve the money each time it comes back to them. For example, you take out a loan for a car. When you go to the dealer to purchase the car, the loan you took out from the bank goes to the owner of the car lot. If they bank at the same bank as you, then they can loan it again. If not, the bank that the owner of the car lot banks with can loan it out, but that doesn’t affect the original bank. So yes, there can be \$2,500,000 of funds loaned out, but that doesn’t mean that BJSH Bank will loan all of it. They only have full control of the initial \$500,000.

rlange Wrote: ------------------------------------------------------- > daj224 Wrote: > -------------------------------------------------- > ----- > > > not badly worded, just tricky. it got me, too. > > > > I went with .8% of 500,000 but of course, we > now > > know it is EXCESS reserves. banx can do what > they > > wish with that, since as we know, banx create \> by \> \> lending out the YOU LENT THEM (in the form of > > deposits) > > > That is true, but they only have full control over > the initial \$500,000 on who they lend that out to. > Once they lend that out, the money will go to > whichever bank the new “owner” of the money is. > Unless this is the only bank in the country, > chances are not likely they will recieve the money > each time it comes back to them. > > For example, you take out a loan for a car. When > you go to the dealer to purchase the car, the loan > you took out from the bank goes to the owner of > the car lot. If they bank at the same bank as you, > then they can loan it again. If not, the bank that > the owner of the car lot banks with can loan it > out, but that doesn’t affect the original bank. > > So yes, there can be \$2,500,000 of funds loaned > out, but that doesn’t mean that BJSH Bank will > loan all of it. They only have full control of the > initial \$500,000. 2.5M is total deposits than can be created among ALL banx with this 500K. question says “this bank” so they do not care about the 2.5M again, this is a tricky li bitch – THANKS FOR POSTING IT!